Monday, May 16, 2011

As a potential homeowner, I've been trying to assess which way the housing market is going. I've seen in my local market "falling prices" "bidding wars", and "all cash buyers." What does it mean? Am I going to miss out on the next bull market? Fortunately for me, unfortunately for the US, it looks like the market is well and truly screwed and there's no reason to hurry.

Consider that US Owner-Occupied Households fall into 1 of 2 categories:

Without Mortgage (~33% of the market, ~25M households): They own their house free and clear, owning 100% of the equity value of their home

With a Mortgage (~66% of the market, ~48M households): They own their house, but have a mortgage. Assuming a normal distribution, you'd expect the average homeowner to have perhaps 60% (halfway between 20% and 100%) of the equity value of their home.

Today 20 million of homeowners with a Mortgage, or 40% of them, have negative equity. They owe more on their mortgage than their house is worth. Simply put, these people are in a world of hurt.

What about the other 28M? Unfortunately, they on average owe 85% (0.8/5.4 = 15%) of the value of their home - 2 out of 3 homeowner own little-to-no household equity.

Why is this important to home prices today? 80% of home purchases are made by people who already own homes. So when 2 out of 3 households with homes have no equity in the bank, they have no ability to be "move-up" buyers, and support the higher-end of the market.

When I think about home appreciation, the current price isn't what I'm thinking about. I'm thinking, "will somebody be able to pay me this much or more for this house 5-10 years ago?" Based on this analysis, I believe the answer to be no. I'll continue staying on the sidelines for a ways to come.

2 comments:

To make the matter worse, consumers and companies are so-indebted that they cannot really afford additional mortgages. So without the recovery of the housing market, there is no recovery of the economy; but housing market cannot recover without deleveraging on the part of the whole system.